Personal loans are a type of loan that can be used for anything. They vary from a mortgage or auto loan in that they must be utilized to purchase a property or a car, respectively. Selecting a lender based on available interest rates (your credit score will affect the interest rates offered to you, with the lowest rates given to borrowers with the highest credit scores), filling out an application, running a credit check, getting approved, disbursing the loan, and repaying the loan with interest over months or years is fairly simple.
Personal loans may have cheaper interest rates than credit cards. So, if you're battling with credit card debt, you might be thinking if you should acquire a debt consolidation loan to help you get out of debt. Is this a wise financial decision for you? Here are some reasons why you should reconsider.
You may not get a lower interest rate
If you have a poor credit rating and card debt, you might not be able to acquire a cheap interest rate. There are lenders who will work with people who have less-than-perfect credit, but you will pay a higher interest rate than if you have strong or exceptional credit. You may not earn a profit on a personal loan depending on the interest rate on the credit card(s) you intend to pay off. Shopping around with various personal loan providers is one method to ensure you receive the best price possible, even if you have a poor credit score. Many provide pre-approval so you may see what conditions you qualify for before you commit.
Personal loans may come with extra fees
Additional fees are another issue that might occur when utilizing a personal loan to pay off credit card debt. Some lenders will charge you a fee for obtaining the loan, which typically ranges from 1% to 8% of the entire loan amount. You may also be charged a penalty for returning the loan early, an application fee, and late penalties if you are late on a payment.
Secured loans can be risky
If you are unable to obtain an unsecured personal loan, you may need to obtain a secured loan. These may have lower interest rates, but that is because you risk the lender seizing collateral like as your home, vehicle, or other assets if you do not repay them. This is an option if you are unable to obtain a loan elsewhere, but putting up collateral adds another layer of possible complications when using a loan to pay off credit cards.
It may not fix your spending problem
This final reason is critical. You will save money by paying off your credit card debt if you can obtain an unsecured personal loan at a fair interest rate. However, it will not fix your spending problem unless you are ready to get to the source of the problem. Assume you acquire the loan, pay off the credit cards, and then fall into problems again, this time with a $0 beginning debt on all of them.
Avoiding the temptation of credit cards may appear to be the safest option, but cancelling your cards after they have been paid off is not always a wise choice. Closing unused cards has a negative influence on your credit score since it reduces your available credit limit and average account age.
In the end, only you know yourself. Will you be able to avoid reloading your cards and falling further into debt if you pay them off using credit? If you answered no or are unsure, a personal loan to pay off your credit cards might not be the best option for you.
Debt payoff alternatives
This year, I paid off my credit card debt without taking out a personal loan. There are several options for debt repayment. I used the Ponzi scheme strategy, which involves putting more money towards paying off your lowest obligation first and then moving on to the next one.
When you reach your highest debt, all of the money you put into your other credit cards is transferred to that one balance.
Another debt-reduction strategy is the debt avalanche approach, which involves focusing on paying off the highest-interest debt first. This strategy saves money, but it is not as psychologically fulfilling as the Ponzi scheme method of debt repayment. It may be incredibly encouraging to watch your debt disappear through a Ponzi scheme.
Many well-meaning individuals will tell you that you can budget your way out of financial difficulties, but this requires that you make enough money to begin with. To establish your individual status, compare your costs to your income. However, you'll probably discover that bringing in more money, whether through a part-time work or a better-paying full-time employment, is more productive for your debt payback (or both).
Debt repayment is difficult. It's difficult to be honest with yourself about your money, but the rewards (both financial and emotional) are huge. Taking out a personal loan to assist you get out of credit card debt may be a viable answer for you, but you should think about all of the above before making a final decision. I wish you the best of success and will keep my fingers crossed for you.
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